Verizon Keeps on Climbing in Q2, Bids for Rural Cellular

Verizon has reported its results for the second quarter of 2007, with consolidated revenues up 6.3% year-on-year (y/y) to US$23.37 billion, operating income up 29.0% to US$4.1 billion, and earnings up 4.5% to US$1.68 billion.

Wireless: The Verizon wireless operations continued to lead growth with a net gain of 1.3 million customers despite the loss of 300,000 wholesale customers due to the bankruptcy of a re-seller. “Nearly all” of the 1.6 million retail additions were higher-value post-paid customers. This took Verizon Wireless to a total of 62.1 million subscribers compared to the number-one-by-subscribers player, AT&T, on 63.7 million. 97% of subscribers are now direct retail customers. Blended churn continued at 1.08% while post-paid churn fell marginally from 0.89% to 0.85% as it continued to lead the industry with this metric;AT&T managed to hit 1.2% for post-paid customers and 1.6% for blended churn in second-quarter 2007. Revenues rose by 17.1% y/y to US$10.8 billion, continuing to lead over AT&T, which grew wireless revenues by 12.7% y/y to US$10.4 billion. This was helped by rising ARPU to US$51.84, up by 3.0% y/y. Of this, US$9.84 was from data, up 48% y/y. Data revenues rose by 70.3% y/y—the same comparison in the first quarter was 66.9% growth as the rate of growth in data revenues continues to speed up. 27.5 million or 46% of retail customers now use 'broadband'-capable equipment and 39.5 million customers are now data users.

Wireline: Wireline revenues fell marginally by 1.1% (adjusted, non-Generally Accepted Accounting Principles (GAAP)) y/y. The telecoms consumer market lost 2.1% in revenues y/y to hit US$4.2 billion, largely due to losses in the former MCI mass-market customer base, which dropped by 35.0% compared to 13.4% growth in legacy markets. The overall access-line count fell by 7.8% y/y to 43,288 as access-line losses continue to accelerate, but were counterbalanced by an 11.6% increase in data revenues. This increase in data revenues was led by a 26.4% growth in consumer broadband subscribers to 6.8 million, or a total of 7.7 million broadband connections, including business and wholesale connections. The FTTP FiOS service continued to be popular, with 203,000 new subscribers over the quarter, taking it to 1.1 million subscribers.

Entry into the video-services market also continued to benefit Verizon as it more-than-doubled video subscribers from 487,000 a year previously to 1.26 million. This included a rise from 55,000 to 515,000 FiOS TV subscribers in a year, with 125,000 new FiOS TV customers in the second quarter alone. Verizon also added 311,000 new Satellite DirectTV customers over the year, with net additions for satellite services jumping from 44,000 in the first quarter to 78,000 in the second quarter of 2007 as Verizon became a more recognisable TV-service provider. Away from the consumer markets, Verizon’s business has seen steady y/y growth for several quarters following a period of significant decline, though growth in 'strategic services' continues to run away consistently at 25.5%.

Rural Cellular: In a response to the acquisition of Dobson Communications by AT&T, Verizon Wireless has announced the acquisition of Rural Cellular Corp. Both companies were launched in 1990 and target the same type of rural markets, mainly using the longer-range spectrum in the 850MHz frequency. Rural Cellular also notes that its network provides coverage to a number of resort destinations, increasing the value of roaming revenues.

The offer of US$45 per share is a 16% premium on the 10-day trading average and 41% over the closing price on Friday 27 July 2007. Totalling US$2.67 billion including debts, the acquisition is valued at roughly half the US$5.1 billion including debts for the Dobson acquisition. It will bring Verizon 716,000 customers (first-quarter 2007) in Maine, Vermont, New Hampshire, New York, Massachusetts, Alabama, Mississippi, Minnesota, North Dakota, South Dakota, Wisconsin, Kansas, Idaho, Washington, and Oregon. Dobson brought 1.7 million subscribers to the AT&T GSM network in Alaska, Arizona, Illinois, Kansas, Kentucky, Maryland, Michigan, Minnesota, Missouri, New York, Ohio, Oklahoma, Pennsylvania, Texas, Virginia, West Virginia, and Wisconsin. The Rural Cellular network covers a 'licensed POP' (population) of 4.7 million across five contiguous territories, compared to the 13 million covered by the Dobson network using both GSM and CDMA technologies. Verizon has stated it will convert GSM customers to CDMA but will maintain the GSM network to leverage roaming revenues and expects to save some US$1 billion in synergies arising from reduced roaming and operational expenses. At the end of 2006, Dobson operated 3,002 cell sites, mainly on leased towers and other structures, owning 69 towers while Rural Cellular operates 1,158 cell sites using 2.5G GPRS/EDGE and CDMA 2000 1xRTT technologies (see United States: 2 July 2007: AT&T Acquires Dobson Communications for US$2.8 bil.).

Outlook and Implications

Enhancing Coverage: The acquisition of Rural Cellular is part of the drive by the main carriers to build out national coverage without relying on roaming agreements. These made up a substantial portion of Rural Cellular's revenues, with Verizon and T-Mobile together accounting for 93% of Rural's roaming revenues. Verizon has already offered services in a number of areas covered by Rural Cellular, though these are likely to have been concentrated on the metropolitan service areas rather than the rural and resort destinations covered by Rural Cellular. Further acquisitions of small rural operators are to be expected as the tier-1 carriers are generating significant cash flow and continue to expand their owned networks to reduce roaming revenues and compete on the extent of coverage they are able to offer.